The Joint Committee has provided comments on the 2019 Budget proposals to align Canada’s employee stock option rules with those in the U.S. through applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms (i.e., the s. 110(1)(d) deduction). Heads of commentary included:
- The need for an adequate consultation period and subsequent transition period
- The desirability of clarity as to the distinction between “large, long-established, mature firms” and “rapidly growing Canadian businesses” (stating in this regard that "The references to 'start-ups' and 'long-established' suggest factors having to do with time and age, while the reference to 'rapidly growing Canadian businesses' suggests a more functional approach that is not limited by age) while at the same time having the distinction be grounded in the policy objective (and notes as to the somewhat intractable nature of this distinction).
- The need for a methodology for distinguishing between options that are within the $200,000 annual cap and those that are not where only a portion of the employee’s options are exercised, stating in this regard:
It is not clear from the Budget 2019 commentary whether the proposed $200,000 restriction is confined to claims for deductions under paragraph 110(1)(d) in respect of stock option benefits or whether it would also apply to claims under 110(1)(d.1) in respect of a benefit that relates to shares of, or rights to acquire shares of, a CCPC. Presumably at least part of the underlying rationale for the existing distinct treatment of CCPC options is a general lack of liquidity coupled with significant valuation uncertainty, which would seem to support excluding CCPC options from the new restrictions, particularly in light of the $200,000 “bright line” cap being contemplated. This should be considered and clarified before the details of the proposal are released.
- The desirability of rectifying the prescribed share definition (as described in the Committee’s November 15, 2016 submission) at the same time as the introduction of the new rules.
The Joint Committee has provided comments on the 2019 Budget proposals to align Canada’s employee stock option rules with those in the U.S. through applying a $200,000 annual cap on employee stock option grants (based on the fair market value of the underlying shares) that may receive tax-preferred treatment for employees of large, long-established, mature firms (i.e., the s. 110(1)(d) deduction). Heads of commentary included:
- Confirmation that, where the employee is subject to the proposed restriction (i.e., is fully taxable on the benefit), an employer deduction will be available at the same time irrespective of other ITA provisions such as ss. 7(3)(b) and 143.3, stating in particular that:
In order to avoid disputes, the legislation should very clearly (i) provide a codified deduction for the stock option benefit, (ii) provide that the deduction is available notwithstanding other provisions of the Act, including in particular, paragraph 7(3)(b) and section 143.3, and (iii) apply equally irrespective of whether the option is exercised physically or cashed out. The provisions of subsection 110(1.1) should be carefully examined in the context of the proposed introduction of a codified corporate deduction to ensure these provisions remain appropriate.
- Moreover, there also should be full contemporaneous employer deductibility for phantom stock units, performance share units and deferred share units regardless of whether such compensation is ultimately paid in cash or in kind (stating: "In brief, full deductibility to the employer should always be available to the employer if there is full taxation to the employee, regardless of the form of the compensation."
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